April 23, 2008
Oil Hits $120...How High Will It Go?
One thing that has certainly affected my personal economy as of late has been the increasing cost on my budget for filling up with a tank of gas. More money spent on gas means I have less money for everything else because my income is a fixed and I'm subject to the budget-contstraint curve.
Yesterday I filled up at the Albertsons on Research Parkway (the same gas station that recently sold the $600,000 Powerball ticket) and was instantly out $60. I COULD have bought 60 Powerball tickets!
By buying gas, the friend I was with said that I should be proud of myself because I'm pumping money into the economy especially in our current market condition and then went onto explain how a car is a necessity and paying for gas is just "one of the things we have to do."
Well, I went home and thought about this a little more. Economics 101 says that an increase in price corresponds to decreased demand. But if my friend is correct and a car is indeed a necessity, then the car is a necessity because you're using it to accomplish pertinent day-to-day activities like going to and from work (You need to make money to live, right?).
Therefore, an increase in the price at the pump won't decrease the amount of miles driven because the number of miles you drive is fixed (sure, you might not go to the mall on the weekends anymore and might cancel that summer road trip). But you will drive to places you MUST drive to.
So the point of this posting is to point out that this "law" of economics which says that an increase in price leads to a decrease in quantity demanded may not be entirely true.
And this is certainly the case with inelastic goods such as gasoline! Am I right or am I right?